AN ANALYSIS OF THE DISTRIBUTION CHANNEL OF NESTLE-INDIA
SUBMITTED BY BIBHUTI BHUSAN H MISHRA TARAKA RAJESH DASARI VIDYA KP
About NESTLÉ NESTLÉ India is a subsidiary of NESTLÉ S.A. of Switzerland. With eight factories and a large number of co-packers, Nestlé India is a vibrant Company that provides consumers in India with products of global standards and is committed to long-term sustainable growth and shareholder satisfaction. The Company insists on honesty, integrity and fairness in all aspects of its business and expects the same in its relationships. This has earned it the trust and respect of every strata of society that it comes in contact with and is acknowledged amongst India's 'Most Respected Companies' and amongst the 'Top Wealth Creators of India'. NESTLÉ's relationship with India dates back to 1912, when it began trading as The NESTLÉ AngloSwiss Condensed Milk Company (Export) Limited, importing and selling finished products in the Indian market. After India's independence in 1947, the economic policies of the Indian Government emphasized the need for local production. NESTLÉ responded to India's aspirations by forming a company in India and set up its first factory in 1961 at Moga, Punjab, where the Government wanted NESTLÉ to develop the milk economy. Progress in Moga required the introduction of NESTLÉ's Agricultural Services to educate, advise and help the farmer in a variety of aspects. From increasing the milk yield of their cows through improved dairy farming methods, to irrigation, scientific crop management practices and helping with the procurement of bank loans. NESTLÉ set up milk collection centers that would not only ensure prompt collection and pay fair prices, but also instill amongst the community, a confidence in the dairy business. Progress involved the creation of prosperity on an on-going and sustainable basis that has resulted in not just the transformation of Moga into a prosperous and vibrant milk district today, but a thriving hub of industrial activity, as well. NESTLÉ has been a partner in India's growth for over a century now and has built a very special relationship of trust and commitment with the people of India. The Company's activities in India
have facilitated direct and indirect employment and provides livelihood to about one million people including farmers, suppliers of packaging materials, services and other goods. The Company continuously focuses its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings. The culture of innovation and renovation within the Company and access to the NESTLÉ Group's proprietary technology/Brands expertise and the extensive centralized Research and Development facilities gives it a distinct advantage in these efforts. It helps the Company to create value that can be sustained over the long term by offering consumers a wide variety of high quality, safe food products at affordable prices. NESTLÉ India manufactures products of truly international quality under internationally famous brand names such as NESCAFÉ, MAGGI, MILKYBAR, KIT KAT, BAR-ONE, MILKMAID and NESTEA and in recent years the Company has also introduced products of daily consumption and use such as NESTLÉ Milk, NESTLÉ SLIM Milk, NESTLÉ Dahi and NESTLÉ Jeera Raita. NESTLÉ India is a responsible organization and facilitates initiatives that help to improve the quality of life in the communities where it operates.
Presence Across India After more than a century-old association with the country, today, NESTLÉ India has presence across India with 8 manufacturing facilities and 4 branch offices. NESTLÉ India set up its first manufacturing facility at Moga (Punjab) in 1961 followed by its manufacturing facilities at Choladi (Tamil Nadu), in 1967; Nanjangud (Karnataka), in 1989; Samalkha (Haryana), in 1993; Ponda and Bicholim (Goa), in 1995 and 1997, respectively; and Pantnagar (Uttarakhand), in 2006. In 2012, Nestlé India set up its 8th manufacturing facility at Tahliwal (Himachal Pradesh). The 4 Branch Offices located at Delhi, Mumbai, Chennai and Kolkata help facilitate the sales and marketing activities. The NESTLÉ India’s Head Office is located in Gurgaon, Haryana.
Brands Milk Products and Nutrition
Beverages
Prepared Dishes and Cooking Aids
Chocolates and Confectionery
Distribution Structure of Nestle
Stocks manufactured at the factories and co-packers reach the C&S through mother Godowns. The stocks stored at C&S are the property of Nestle. Encashment of stocks are done through Invoicing to Cash Distributors C&S as per the guidelines given to them. They also receive and store support materials like give away’ s, stickers and complementary items etc.
Logistics Structure
Logistics comprise of Road Transportation through Container trucks
From the factory to the distributor stage the company ensures that there is availability of cool chain for transportation. At the mother godown (Located at Sahibabad) there is temperature control by hired cold storage.
For the purpose of transporting chocolates from the mother godown to the Cash Distributor Dedicated Air Conditioned Vans are used (especially for the summer seasons).
Distribution from point of Distributor warehouse to Retailer shops / Modern trade shops is handled by Distributor
Distributor has fleet of mix of transport vehicles right from refrigerated vans to small tempos to supply to Pan shops
Company is connected to Distributor / Super Stockist through SAP for online order booking and processing
“Stock in Transit” module is installed at Distributors network systems for tracking the supply of goods
Transportation system followed by Nestle
Moga Factory
By Road
By Rail Direct
Trucks
Sahibabad Mother Godown
Direct by rail containers
Delhi-UP border Transhipment Godown
Indore
Hyderabad Mostly by Road : Containers / trucks
Patna/ Calcutta
Guwahati
By trucks
C&S
C&S
C&S
C&S
By Canters / Vns
C.D.
C.D.
C.D.
C.D.
C.D.
C.D.
C.D.
Company’s Distribution Guidelines
The company has created two kinds of distributors, namely Trade and Chocolate. The former deals with the Maggie range, Nestle dahi, Aquafina etc. Chocolate deals with all confectionery items like chocolates, sweets etc.
A representative of each distributor goes to the various outlets, once or twice a week (depending upon the area), takes the order and then either delivers the goods there and then, or on the same day.
It has been realized that a retailer has a limited pocket for a day’s purchase. If one sales representative goes for an order with 50 SKU’s the retailer will only buy what his pocket allows, for a one-time purchase. Whereas, if two different sales people go, representing different distributors there is a possibility both will get an order and the company will witness better sales.
The company has also taken an initiative for deeper reach and penetration into the market with its operation “STING”. Whereby the sales representatives on the company go on bicycles and try to fulfill the order of small ignored and unserved outlets. For example, the panwallas, the kirana stores etc.
Selection of Distributors
Capital investmentThis is dependent not only on the present required turnovers but also on the estimated future capital investments that will be required by the distributor (based on company’s growth plans in the area). Amounts required vary from area to area and markets to markets.
Relevant experienceIt is imperative that the distributor has had some prior experience as a channel member in the FMCG sector so that no training is required to be imparted to him on aspects of the business. The distributor should not be dealing in competitor’s products and should be able to function as a dedicated channel for Nestle. For example, while deciding on a distributor for chocolates, an obvious preference would be an existing distributor for other products of Nestle This is because he will pay attention to the entire range of the chocolates and not focus on any particular SKU only.
InfrastructureAppropriate infrastructure (depending on the market served and overall volumes)
o Godowns / storage space. For chocolates, air conditioned godown space (with wooden padding will be required). o Delivery vehicles o Salesmen
Counter Analysis Types of Counter
Supermarket
Small Grocery Store
Big Grocery Store
Convenience Store
Local paan store
Chemist
Incentives to the distributors 1) Margins
2) Schemes spread over 2-3 months. These schemes encourage specific target achievements. Targets are given as indexed growth rates based on weights. For example, the meaning of 10% growth for a distributor having sales of Rs.20000 will have a different meaning from one having sales of Rs.1 lac. The prizes in the schemes can be monetary- for example additional 2% margin on turnover Or non-monetary – for example, free T.V. sets on achievement of targets. It is attempted to keep in mind the monetary benefit to distributor in case he sells the gift given in kind. Secondary schemes: Promotional schemes to consumers & Trade Partners such as free packs for Consumers, gifts, bundling, price off etc. For retailers: Coupon, Bulk discount, Additional Margin, Free packs 3) CertificatesCertificates of acknowledgement for achieving the targets for a name like Nestle are priced by the distributors. They frame them and display them in their offices. Motivation of Channel Partners – “Proud to be Nestle” The company consistently comes up with schemes for it channel partners to motivate them. One of their successful schemes was “Proud to be Nestle – Supper awards for super achievers!” This contest was open for the following: i.
Area Sales Managers
ii.
Sales Officers
iii.
Cash Distributors
iv.
Pallet Salesmen (a S.O. may have 2-3 Pallet salesmen reporting to him to enable him cover a wider territory.)
v.
Distributor Salesmen (These salesmen are the employee of the distributor, but are under indirect pay roll of Nestle, since their salary is reimbursed by the company.)
vi.
Merchandisers
The top ranked ASMs (Nos. as fixed by the Branch) and their teams take home the following prizes: RDBM
T/O SO
CD
PS
DS
Merchandisers
growth achieved 20% +
5500
3500
2300
2000
1200
15-19.99%
4500
2500
1800
1500
1100
10-14.99%
3500
1800
1300
1000
1000
The Top ranked ASM team also wins a TEAM TROPHEY and certificates.
Evaluation Once a distributor is appointed the company generally does not take away business from him, except when the underperformance has been observed over long periods. While evaluating his performance, his targets performance is studied relative to that of other distributors in the nearby area (because growth patterns may vary by region)
Distribution in Practice (DIP) Training There are proper training programs for the C&S agents as well as distributors. Following are the modules included in the program: -
Nestle Quality System
-
Good Warehousing Practices (GWP)
-
Good Distribution Practices.
Major aspects of the program include: 1. Stacking as per norms: FIFO basis of Inventory management is used. Stocks are kept in pallets away from the walls. Godown. Stacking is done in an orderly fashion and the different batches are visible. There must be moving space between various stacks. 2. Good Warehousing Practices
Security
Fire Fighting: Appropriate provisions are made to handle emergency caused due to breakage of a fire.
Cleanliness
Pest Control
Temperature record and maintenance at A.C. Godown
Proper ventilation
The required Licenses as per the local laws have been obtained. For Eg. Sales tax etc.
Transportation: Effective, reliable and quick transport is available to and from the warehouse.
Proper Loading / unloading: The labours have been properly trained to ensure that no damage to the goods take place at the time of loading / unloading.
Remittance: Timely deposits of remittances are ensured.
Proper records are maintained with regard to Sales tax and exemption certificates.
3. Accounting A stock register is maintained to record receipts and dispatches with detail of accompanying documents. Shortages (if any) are accounted for separately. Sales tax and Octroi are handled by C&S. A separate register is maintained for materials which are meant for free distribution. All the related expenses that are incurred are paid by C&S and are subsequently reimbursed by the company. 4. Handling of Bad Goods: The bad goods are separated and marked “saleable” or “unsaleable” appropriately. 5. Temperature control for chocolates: is ensured not only at the time of storage but also at the time of transit.
Forecasting and target setting Target setting is a result of negotiation between the distributor and the company. Mid-month targets for the next month are given by the company at around 5th -10th of a month. These are set for the Sales officers, ASMs and Branch Managers in the hierarchy and driven down by them. At the month end the distributor can negotiate these targets in the range of +/- 10%. The branch manager is responsible for coordinating targets of the factories and the targets of the individual product managers.
For a sales officer, the focus is the redistribution targets, also called as secondary invoicing (from cash distributor to the redistributors) For an ASM, primary invoicing (From C&S to cash distributor) is more relevant. For the company as a whole, primary as well as secondary invoicing as adjusted against “back” is important. The company is now moving on to a statistical tool called “Winters model” for demand forecasting”. This is done by the SCM and the inventory managers at the corporate levels along with interactions with the sales and senior sales officers. Under the winters model, the baseline demand curve is worked out, that is remove the effects of other factors like sales promotions, unexpected variations like wars etc. on sales. This is done by the sales officer by preparing a monthly log and writing against each month the reason for any exceptional variation in sales, if any. After negating from the past sales, the effect of these exogenous variances, trends are calculated and sales of the next year are calculated. On these figures, the effects of any planned promotions, any foreseeable variations etc., are imposed to get the approximate forecasts. For example, normally the effect of a TPP (Temporary Price Promotion) on sales is that of a 150% sales. That is sales of 6 weeks are achieved in 4 weeks. Inventory holding: on an average 3 ½ weeks of inventory is held
Channel Conflicts Earlier large areas used to be assigned to the distributors and there used to be some scope for confusion or conflict due to overlapping. However, now the number of distributors have increased and there is clear earmarking of the areas as well as markets for each distributor by the company and there is hardly any scope for conflicts based on areas.
Wholesalers
Wholesalers are not a part of the formal structure of Nestle India’s distribution network
Make bulk purchases from the distributors directly thereby leveraging on the margins
Typically, the wholesaler gets a margin of about 2%-3% from the distributor, of this he retains 1 % and passes on the remaining 2% as discount to the retailer
This discount induces the retailers to buy from wholesalers
Sales Officers
Account of invasion of another’s sales area by a company’s sales officer under pressure of sales target
Credit Policy Nestle India Limited: The distributors are termed as Cash Distributors because the company charges the distributors before the stock is delivered; the company has connected the distributor online and the transactions happen online. The Distributor: The distributor sells goods on credit; the period of credit ranges from 1-2 week. The wholesaler allows discount of 1% on cash payment (policy followed by the wholesaler).
Stock Policy: As per the company regulations the distributor is supposed to maintain a stock of 3 weeks; the distributor maintains a stock of 3 to 3.5 weeks in monetary terms it equals to Rs.30 lacs for the distributor. The stock is formalized by the company; the dealer can negotiate on 3-4 end days; the stock policy is formed for the month. The distributor, to push in slow moving SKU’s, clubs them with fast moving SKU’s for the retailers. DUMPING: The company dumps significantly on the distributors, the distributor has to manage the supply by the company. The distributor has some resentment on the issue but has to be
content with it, the result is, the stock gets blocked and distributor stores it till the expiry and then return it; result: cash crunch for the distributor and loss for the company in the long run.
Lead Period Wholesaler: The lead periods in providing stocks to the dealers differs from the SKU and quantity ordered; some SKU’s are delivered correspondingly with taking order but some are sent from the warehouses. A higher quantity ordered has to be replenished from the warehouse. Company: The stock from the company is provided every month but company keeps replenishing stocks at the requests of the distributors. It takes 2 days for company to replenish stocks.
Return Policy The company follows a policy of return when the product has passed its expiry date, damaged or has a defect; the replenishment is done with cash and happens at the end of every six months.
Return On Investments The company does not give any guarantee to the distributor with regard to returns on his investment which is in line with the market credentials of the company.
Storage Policy The distributor maintains Cold Storages and Deep Freezers for the storage of the products; the investment in infrastructure is considerable for the company to provide such infrastructure.
Sales Force The company does not have a policy to train the staff of the distributor, the distributor trains his own sales force. The remuneration and all other expenses are borne by the distributor.
Promotion Policy The company follows a policy for consumer promotions but as regard the trade promotions they are scant rather negligible, the promotions put in extra pressure to push more quantity. The
problem of maintenance of the promotional item is considerable and takes in huge energies and money.
Issues & Recommendations with Nestlé’s Channel Distributor Salesman Workload Problem: On an average, the number of active Stock Keeping Unit (SKU) is approximately 130 SKU’s/outlet. Also, the average outlets in market beat plan of a distributor salesman are 35 outlets/day with the range being between 20 and 40 depending upon the kind of market he is given. From this information, the DS workload turns out to be around 4550 SKUs per day, which means that he has to read out 4550 SKUs from the dealer card to the retailers. This results in the DS being overloaded with work which shifts his focus on the products with a pull from the market, rather than products requiring push as that would take more effort and time, without any benefits for the salesman. Recommendation: Company has a large number of SKUs. It may have separate salesman for different products. It may sell Cerelac, Nescafe etc. through one distributor salesman and Maggi, chocolates through another distributor. In this manner, the salesman will have lower number of SKUs to cover and may concentrate more on his SKUS. The salesman may cover more number of retailers per day. This may help to improve the efficiency of the distributor salesman. Increased number of beats also helps in greater push. Issues in implementation: The costs will increase for the company with two salesmen instead of one. The increased number of salesman will squeeze the margins of the company. Tackling of Issues: The SKUs should be divided for distribution through separate salesmen such that the efficiency of distribution is optimized. The increase in sales should more than offset the increase in the costs. It is important that marginal benefit is more than the marginal cost incurred. Distributor Salesman Incentives Problem: Currently, each Cash Distributor receives an input sheet from the sales officer which specifies the incentives to be given to the Distributor salesman. Currently, Nestle has incentive
of Rs.250 for volume achievement for 4 products each month. They are not given any incentives for the overall sales achievement or on the basis of their evaluation by the sales officer. These incentives are presently being given in many states such as Delhi and UP but not present in many other places. DS are not motivated enough to push the sales of the whole range of products of Nestle and are concentrating on the products which have incentive in that particular month. The incentive schemes for other competing FMCG companies had a component for the total turnover as well as number of bills generated by the company. Recommendation: Company should provide similar incentives in Gurgaon as in other states. Also, there need to be incentives based on total sales and number of bills per month. A component of incentive should also be based on the total number of outlets from which order is taken. This will provide an incentive for all salesmen to perform better. Also, the better salesman will be able to get higher compensation. Issues in implementation: All territories are not same or equivalent. There may be more opportunities in some territories for higher sales as compared to others. Therefore, incentives based on sales are not sufficient alone. Other important parameters need to be accounted for such as the penetration level of salesman. Tackling of Issues: The sales manager should also look at the penetration level of salesman and the number of new accounts added during a period. The market share in a particular territory is also an important parameter in judging the performance and efficiency of a salesperson. A sales manager should also have some room for subjective analysis of the performance of salesman.
Complaint from Retailers about expiry of goods and payments Problem: Retailer drives the growth for Nestle as he is the seller to the customer. This makes focus on the retailer very critical. There seems to be considerable complaints about retailer’s expired and damaged goods were not returned timely at various retailers. The main reason cited by them was that low expired goods translate to a good performance for Sales Officer, which drove them to reduce the expired goods taken back by the salesman. Also, the merchandising display payments to retailers were delayed at several outlets. This was mainly due to the fact that
distributors’ claims were not being cleared timely which was in effect, delaying payments to the retailers. Recommendation: Nestle should stress on maintaining a healthy relationship with the retailer, hence it should encourage Sales Officers to concentrate in timely return of expiry goods as well as payments. To ensure that, a window should be provided to the retailers as well as distributors for their inquiries, claims and complaints to the company. Also, Nestle can have frequent audits of the certain markets each month to prevent such incidences. Issues in Implementation: The issue with a window to retailers would be that there could be instances of retailers complaining incessantly and for petty issues rather than for the intended purpose of tackling genuine retailer relationship issues. Also, such system would incur a cost to the company which affects its profitability. Tackling implementation issues: To ensure that the window to the retailer serves the right purpose, the complaints can be filtered at the distributor level before being passed on the company. This would ensure that certain petty and insignificant problems can be solved at the distributor level only and the processing at the company is reduced.
Lowest Margin in the industry Problem: Nestle gives out the lowest margins to the distributor in the industry.
Hence, the margins to the retailers are also reduced. If we consider the motivation of the retailers to keep Nestle’s products, the throughput or off take of Nestle’s products is very high
and most retailers would be keen to maintain their baskets of goods, the low margins are a dampening factor, as mentioned by a few retailers in our interactions. Recommendation: Considering the low motivation of the Nestle retailers, due to lower margins on products sold by them, company should try to compensate them or give them an opportunity to increase their profits by extending better percentage incentive schemes on purchase in bulk. Instead of harming the profitability of the company by extending greater margins, these schemes would lead to high volume purchase by retailer, thereby increasing the profitability of the company. Issues in implementation: The problem which could emerge while extending greater percentage schemes are that once the retailers get used to higher schemes on a particular product, it becomes very difficult for the company to change/ reduce the scheme on the product. Apart from that, profitability of the company is definitely affected if the scheme is extended in an unplanned manner. Tackling Implementation issues: These schemes should not be extended on the products haphazardly. In order to implement the schemes, company needs to identify on which products is the scheme suitable. The products which already have a very good pull effect like Maggi need not be given higher schemes. The products which majorly require pull effect like Everyday tetra pack milk, coffee etc should be a part of such incentive schemes. In order to have better control over the channel and prevent retailer’s resistance while changing/reducing the scheme, company should device a strategy of rotation of scheme among the various products in portfolio, e.g. for Jan-Mar Company could go for higher schemes on Everyday tetra pack milk, for April- Jul it should reduce the scheme on Everyday and increase the scheme on Coffee packs. The company can further decide upon which products it wants to push for a particular time period.
